The modern history of the welfare state dates from the reforms of Otto von Bismarck, chancellor of Germany in the 1870s and 1880s. He was very conservative, in the European sense of opposing radicalism and favoring social stability. When socialist movements first arose in Germany, Bismarck tried to suppress them and his efforts proved unsuccessful. But he observed that the equally conservative Emperor Napoleon III of France had used social welfare policies to undercut support for socialism, and Bismarck tried this tack as well. The Harvard historian Sydney B. Fay describes the conservative origins and rationale for Bismarck’s welfare initiatives, including old-age, sickness, and disability insurance:
Bismarck soon recognized that the anti-socialist law was not a wholly satisfactory solution of the socialist menace. The law was merely negative, repressive. Something positive must be done to make the industrial workers better off, and especially to make them feel that the German state was their friend and not their enemy. This was Bismarck’s main motive in pushing the social insurance legislation of the early 1880’s. . . . With less cause for anxiety and with the state as their friend, the workers, Bismarck hoped, would be more contented, and less likely to listen to socialist agitators. In this way, Bismarck hoped, the power of the Social Democratic Party would be undermined.
To be sure, American conservatism has always been more individualistic than European conservatism, more akin to continental liberalism, which we call libertarianism or classical liberalism. But many American conservatives and even libertarians have expressed sympathy for the welfare state for good Bismarckian reasons. The writer Irving Kristol, who was extremely influential in the intellectual development of Republican and conservative ideas in the 1970s, wrote this in defense of the welfare state in 1976:
The idea of a welfare state is in itself perfectly consistent with a conservative political philosophy—as Bismarck knew, a hundred years ago. In our urbanized, industrialized, highly mobile society, people need governmental of some kind if they are to cope with many of their problems: old age, illness, unemployment, etc. They need such assistance; they demand it; they will get it. The only interesting political question is: How will they get it?
In 1983, the conservative columnist George Will admonished conservatives for opposing the welfare state, rather than endorsing it and molding it to their philosophy. Said Will:
If conservatism is to engage itself with the way we live now, it must address government’s graver purposes with an affirmative doctrine of the welfare state. The idea of such an affirmation may, but should not, seem paradoxical. Two conservatives (Disraeli and Bismarck) pioneered the welfare state, and did so for impeccably conservative reasons: to reconcile the masses to the vicissitudes and hazards of a dynamic and hierarchical industrial economy. They acted on the principle of “economy of exertion,” using government power judiciously to prevent less discriminating, more disruptive uses of power. . . . Conservatives need ways to make the welfare state more compatible with conservative values.
In his 1987 book The Fairness of Markets, the libertarian economist Richard McKenzie argued that welfare benefits were essential to the operation of a free market. Without them, society’s net losers, such as workers who lost their jobs due to free trade policies, would put up roadblocks that would undermine the market, such as protectionism, that would ultimately cost more in terms of growth than the cost of welfare. In McKenzie’s words, “The welfare state is not only desirable but most likely necessary for the continued collective acceptance of the market system. Welfare, albeit limited in scope and amount, meets goals of efficiency (as economists define efficiency) as well as equity and fairness.”
Today’s conservatives often suggest that the American welfare state is alien to the American experience, imposed on the nation during a particularly vulnerable time in its history by a quasi-dictatorial Franklin D. Roosevelt. Nothing could be further from the truth. One of the earliest advocates of social insurance was the Revolutionary War hero Thomas Paine, whose book advocating it, Agrarian Justice, was published in 1797. Another founding father, James Madison, said that welfare is a core government function:
To provide employment for the poor, and support for the indigent, is among the primary, and, at the same time, not least difficult cares of the public authority. In very populous countries, the task is particularly arduous. In our favored country, where employment and food are much less subject to failures or deficiencies, the interposition of the public guardianship is required in a far more limited degree. Some degree of interposition, nevertheless, is all times and everywhere called for.
The University of Wisconsin historian Walter Trattner has documented the considerable growth of American welfare state policies at both the federal and state level in the nineteenth century. In the twentieth century, conservatives such as Theodore Roosevelt advocated studying the German model and developing new policies to “protect the crushable elements at the base of our present industrial structure.” In Britain, conservatives such as Benjamin Disraeli and Winston Churchill were instrumental in creating the welfare state. In America, the welfare state was supported well into the 1960s by key members of the business community. As late as 1970, Republican Richard Nixon advocated a national welfare program called the Family Assistance Plan that failed, ironically, due to liberal opposition that it wasn’t liberal enough. Even in the 1980s, a few Republicans such as the late Jack Kemp openly supported government welfare. As he said in 1985:
If you are going to broaden the base of the Republican Party, you’ve got to realize that millions of Americans look to government as a lifeline. I have never felt personally that the idea of beating up on government was good politics. It’s true that government is best which governs least. But it’s equally true that government is best which does the most for people and you need a balance between what government does for people and what people should be able to do for themselves.
At least insofar as Europe is concerned, many of the claims made by American conservatives about its welfare state are simply wrong. They fail to understand why such states have totally failed to follow F.A. Hayek’s predicted course into socialism and totalitarianism. It would be useful for them to know why because, despite conservatives’ best efforts to undermine it, the American welfare state is inevitably going to grow larger as the baby-boom generation retires and increases spending for age-related entitlements such as Medicare and Social Security. According to the Congressional Budget Office, spending for Social Security will rise from 4.9 percent of GDP in 2014 to 6.3 percent in 2039, and spending for Medicare will go up to 4.6 percent of GDP from 3 percent over the same period.
First, it is important to understand that European welfare states are not really so much larger than the American one. A key reason is that Europeans get a lot of government benefits that Americans are forced to pay for out of pocket, notably health insurance. If an American worker loses 9 percent of his pay to cover the cost of employer-provided health insurance, is he really so much better off than a European worker who pays 9 percent of his wages in the form of a tax that provides him with the same health benefits?
It’s also worth keeping in mind that the American welfare state, insofar as the elderly are concerned, is roughly comparable to European welfare states. The big difference is that Europeans treat the non-elderly poor and working class far more generously than the United States does.
Another important factor is that much of the American welfare state is buried in “tax expenditures.” These are tax deductions, exclusions, and credits that often have identical effects to government spending. But, superficially, they appear to make government smaller even though the same economic resources are commanded.
Consider this example from the late economist David Bradford. Suppose the Department of Defense wants to buy a new ship for $1 billion. It could simply ask Congress to appropriate $1 billion for it, and $1 billion of men and material will be diverted from private to public use, whether the outlay is financed by taxes or deficits. Government will be $1 billion larger. But suppose instead that DOD asked Congress to enact a $1 billion refundable tax credit for the same purpose. Spending would not rise, taxes would fall by $1 billion and it would appear that government is $1 billion smaller than it otherwise would be. But the same $1 billion of manpower and other resources will still be diverted from private to public use. Economically, the two methods are identical.
The political scientist Suzanne Mettler has documented that a great many Americans who believe they receive no welfare benefits from government are in fact the beneficiaries of numerous tax subsidies for housing, health, education, and other purposes.
The Organization for Economic Cooperation and Development has constructed internationally comparable data that take into account forced private spending that compensates for public outlays in other countries, and tax expenditures that co-opt private resources just as spending does. The data also take into account that some countries tax government benefits, which explains why the net figure is lower than the gross figure in many cases. When these adjustments are made, the United States rises from close to the bottom to near the top of countries in terms of the size of its welfare state, from twenty-third place to fifth.
Some conservatives would nevertheless argue that Europeans pay a heavy price in terms of freedom for their welfare states. But this is belied by their own research. Both the Heritage Foundation in the United States and the Fraser Institute in Canada regularly produce rankings of nations in terms of economic freedom. In the 2014 rankings, the United States was number twelve on each list. On the Heritage list, welfare states including Australia, Denmark, Ireland, and Singapore ranked higher; the Fraser list placed Canada, Finland, New Zealand, Switzerland, and, again, Australia above the United States, which was tied with the UK. Furthermore, in the view of the libertarian philosopher Jason Brennan of Georgetown University, such indexes actually overstate freedom in the United States and understate it elsewhere:
After all, the index tends to rank countries lower if governments spend large amounts on social insurance. Yet many classical liberals and neoclassical liberals are not in principle opposed to government social insurance. . . . On the [Heritage] Index of Economic Freedom, many countries that rank lower than the U.S. have far less extensive administrative states than the United States. For instance, Denmark ranks much higher than the United States on property rights, freedom from corruption, business freedom, monetary freedom, trade freedom, investment freedom, and financial freedom. Luxembourg, the Netherlands, the United Kingdom, and many other countries beat the United States on these measures as well. Thus many European countries might reasonably be considered more economically libertarian than the United States.
Several welfare states did better than the United States on all six of these measures: Canada, Denmark, Finland, the Netherlands, and Sweden. What dragged them down below the United States on the overall score was, in every case, high taxes and spending, which the conservative Heritage Foundation weighs heavily and are easily quantifiable. Recent research, however, shows that while higher spending may decrease freedom, higher taxes do not. Research by political scientist James E. Mahon has shown that spending financed with taxes is more highly prized by voters than that financed with deficits or non-tax revenues.
Numerous studies now show that particular types of freedom are more significant than others for economic growth, and those on which many welfare states surpass the United States are among them (here, here, here, here, here, and here). An annual index of the countries best for business routinely puts Denmark, Sweden, Canada, Norway, Finland, the Netherlands, Belgium, and the UK above the United States. Studies also show that some social welfare policies may raise aggregate growth and benefit the bulk of the population while others don’t. Free-market policies can compensate for high taxes and spending.
Of course, economic freedom is only one aspect of freedom. Important things such as freedom of speech, freedom of assembly, and other political freedoms may not be measured. Moreover, freedom from racial and sexual discrimination or the right of gays to marry and other personal and social freedoms generally don’t figure into conservative measures of freedom. But casual observation shows that those living in at least the major countries of Europe appear to have no less political and personal freedom than Americans. And depending on how one looks at the question, they may have considerably more. How much is it worth to be free of fear that one will die because one lacks health insurance? For many Americans this is a real fear, but not for almost all Europeans. How free is an American who can’t make ends meet by working full time, while a comparable European has her wages supplemented by government benefits that make it much easier to get by and live decently?
These factors may explain why many of those living in welfare states consider themselves to be much more free than Americans do, according to a 2014 Gallup poll. The United States came in at number thirty-six, with only 79 percent of people saying they were satisfied with their freedom.
Some conservatives will respond that European welfare states have high unemployment and do poorly at creating jobs, a point Ronald Reagan often made in the 1980s. For example, in one of his last presidential speeches he bragged, “Twice as many new jobs have been created here in the United States as in the other six industrialized nations combined.”
But that was then and this is now. In recent years, European countries have done a much better job than we have of preserving and creating jobs. This fact is best illustrated by the employment/population ratio—the percentage of people with jobs in the population. In 2013, most European welfare states had ratios of more than 80 percent for those in their prime working years, while the U.S. ratio was barely above 75 percent.
One reason for this is that European companies are not burdened with the enormous cost of providing health insurance for their workers, as American employers are. That cost is financed by broad-based consumption taxes that do not fall on businesses. Moreover, the VAT is rebated at the border on exports, so that the tax does not raise the price of exports. These two factors make European exporters very competitive relative to those in the United States, where many taxes such as the corporate tax cannot be rebated and therefore reduce international competitiveness.
Not having to provide health insurance also makes it much easier to start and grow businesses in many welfare states. The fact that entrepreneurs receive valuable services for their taxes makes them much less sensitive to them than Americans are. A recent article in Inc. magazine about booming entrepreneurship in heavily taxed Norway made this point:
The first thing I learned is that Norwegians don’t think about taxes the way we do. Whereas most Americans see taxes as a burden, Norwegian entrepreneurs tend to see them as a purchase, an exchange of cash for services. “I look at it as a lifelong investment,” says Davor Sutija, CEO of Thinfilm, a Norwegian start-up that is developing a low-cost version of the electronic tags retailers use to track merchandise.
In the United States, workers are forced to bear all of the burden of economic adjustment through layoffs and unemployment when there is a recession, even as conservatives contend that all recessions are caused by the Federal Reserve or government screw-ups. European countries, by contrast, have been highly successful with short-time schemes that allow workers to reduce work hours while subsidizing their pay. These allow businesses to hold on to valuable workers and prevent their skills from deteriorating, and also makes it much easier to ramp up production when growth is restored. And wage subsidies are a powerful means of fiscal stimulus. Many analysts have testified to the efficiency of this system and urged its adoption in the United States even though it would involve “big government.”
In addition to wage subsidies, the European welfare state facilitates labor adjustment when necessary. And an important part of the welfare state in Europe involves strong support for education. Germany, for example, recently abolished college tuition. By contrast, American college students must often go deeply into debt just to get an education. High education and skill levels plus wage compression that is augmented by government benefits combine to offset the negative economic effects of the welfare state in Europe to a large extent (see here, here, here, and here).
In any event, what really matters at the end of the day is happiness. While wealth and freedom contribute significantly to it, many people rank other considerations much more highly, such as culture, equality, safety, fulfillment, or even the weather in determining where to live. Not surprisingly, health is a primary contributor to happiness, which gives an edge to countries with national health insurance because they raise the general level of health. Therefore, a measurement of overall happiness may be the best way to compare nations.
According to a 2014 OECD measure, overall happiness was greater in Australia, Canada, Denmark, Norway, Sweden, and Switzerland than in the United States when the various components of the index are ranked equally. A 2012 OECD study looked at eight different indexes of life satisfaction and the United States ranked only as high as seven on just one index; it ranked as low as 22 on two of them and in between on the rest. In nearly every case, those ranking higher would be considered welfare states. Studies show that government intervention in the economy tends to raise happiness (see here, here, here, and here).
A 2013 study by the United Nations ranked all the nations in the world on a happiness scale. The United States came in only number seventeen. The top ten countries were all welfare states (in order): Denmark, Norway, Switzerland, Netherlands, Sweden, Canada, Finland, Austria, Iceland, and Australia. Commenting on an earlier edition of this report, Columbia University economist Jeffrey Sachs said:
The leading countries tax heavily to provide social outlays, for pre-school, health care, education, family support, school-to-work programs, elderly care, and more. They end up with economic prosperity that is broadly shared, very low poverty, low unemployment, social fairness, lower health care costs than in the United States, longer vacation times, guaranteed maternity and paternity leave, better pre-school and many more benefits that make people happy, and help them to raise happier and healthier children. In short, happier places are happier because they combine economic prosperity with social trust, a sense of equality, leisure as well as work, and good and honest governance.
Public opinion polls have also examined happiness and wellbeing simply by asking people how happy they are. In a 2014 survey by Gallup that asked people about their wellbeing in five different areas, the United States did not rank in the top ten on any measure. Those countries thriving in three or more areas included such welfare states as Austria, Canada, Denmark, Sweden, and Uruguay.
Conservatives, obsessed as they are with the nominal size of government, measured exclusively by taxes and spending, may wonder why high European taxes don’t suffocate their economies as they assume would be the case here. The reasons are that Europeans believe they get value for their taxes, have greater trust in their governments and a greater preference for equality, and view those receiving benefits as not dissimilar to themselves (see here, here, here, and here). It actually appears that Europeans enjoy paying taxes: more progressive nations with higher taxes rank higher on happiness measures. Meanwhile, Americans view much government spending as pure waste, have little trust in government, and tend to view welfare recipients as moochers and minorities.
Studies show that Americans are happier in years when income inequality is falling than in years when it is rising. A key reason why Americans do not demand more equality is that they tend to exaggerate the degree of income mobility, which translates to fairness and mitigates inequality. Conservatives emphasize absolute mobility, which shows that children are generally better off than their parents due to economic growth, but ignore the rigidity of relative mobility, which shows that the children of the poor tend to stay poor and the children of the rich tend to stay rich. A recent study found that intergenerational economic mobility is higher in a number of welfare states, including Denmark, Norway, Finland, Canada, Sweden, Germany, and France, than in the United States; only the UK was lower.
Studies also show that Americans grossly underestimate the degree of income and wealth inequality in the United States. When asked what their preferred distribution is, they generally favor European levels that are more egalitarian. They also tend to overestimate their position in the distribution of income; when they’re informed that their position is worse than they imagined, support for redistribution rises.
European taxes are structured differently than those in the United States. While they may have high statutory rates on incomes, they tend to kick in at higher income levels, making them economically less relevant than they appear at first glance. In addition, there are often separate tax schedules for different forms of income that tax capital income much more lightly than wage income. Overall, Europeans tax consumption more heavily and income more lightly than we do (see here, here, here, here, here, and here).
The emphasis on taxing consumption stems in part from a very conservative idea called the “benefit principle,” which says that people ought to pay taxes roughly in proportion to the benefits they receive. Thus highway construction is largely financed with taxes on gasoline; the motorists who use the highways and use them the most pay the most taxes because they are the primary beneficiaries.
What happened in Europe after the war is that liberals and conservatives essentially made a deal: conservatives would support expansion of the welfare state as long as it was financed conservatively. This was the same basic deal that led to the creation of Social Security in the United States with a very conservative payroll tax, rather than the progressive income tax. FDR understood that as long as there was a tight linkage between taxes paid and benefits received—a prime example of the benefit principle—then the system was unassailable, politically.
Taken together, the conservatism of the revenue side and the generosity of the benefit side offset each other in European welfare states. If you add in that many have more free-market policies in the regulatory area that foster innovation, and citizens have greater trust in their employers and governments to facilitate economic adjustment, you have a combination of policies that promote growth not only but equity and wellbeing. The dog-eat-dog capitalism of the United States, which lavishes tax benefits on the ultra-wealthy while throwing society’s less fortunate under the bus, may deliver slightly better growth, but it does so in a harsh and inequitable way that, historically, has not proven sustainable. Eventually, the masses rise up and revolt. Thus welfare state policies may in fact be optimum for the production of wealth in the long run, as Bismarck, Disraeli, Churchill, and FDR well understood.
My personal view is that the Republican war on the welfare state is misguided and futile. I agree with Dwight Eisenhower, who once said, “Should any political party attempt to abolish Social Security, unemployment insurance, and eliminate labor laws and farm programs, you would not hear of that party again in our political history.” He said that those who support such views “are stupid.”
Bruce Bartlett worked for Congressmen Ron Paul and Jack Kemp, in the Office of Policy Development in the Reagan White House, and at the Treasury Department for George H.W. Bush. He is now a political independent.